Trinseo: a specialty chemical – GuruFocus.com

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Trinseo (IS, Financial) is a small-cap specialty chemicals company that operates businesses such as specialty plastics and latex binders. Most of its businesses share industry inputs, operations, customers and end markets. Trinseo was created in 2010 by combining four former activities of the Dow Chemical Company (DOW, Financial). These included the segments of polycarbonate compounds and blends, carpet paper and latex, synthetic rubber and styrenics.

The company operates through six different segments, producing products such as polycarbonate compounds for the medical and consumer electronics markets, basic plastics such as compounds and blends for automotive applications, polystyrenes for general for use in appliances, food packaging and consumer electronics and raw materials which are one of the building blocks of most plastics.

Market end users include appliance, automotive, consumer electronics, packaging, medical devices, footwear, carpet, paper, and construction industries. Trinseo achieved net sales of $4.8 billion in 2021, with 26 manufacturing sites worldwide, 16 R&D facilities worldwide and approximately 3,800 employees. The company has been listed on the stock exchange since 2014 and currently has a market capitalization of $720 million.

I last wrote about this company in April. Since then, the stock price has continued to fall due to headwinds, making it even more undervalued in my opinion.

Recent acquisitions

Trinseo made two major acquisitions last year for a combined value of $1.8 billion, which were mostly financed by new debt issues. Aristech Surfaces, which is a global manufacturer of continuous cast sheets and solid surfaces made of polymethyl methacrylates (PMMA), was acquired for a cost of $445 million. Additionally, Trinseo purchased a large PMMA business from Arkema, a French specialty chemicals company, at a cost of approximately $1.36 billion. I think investors are not yet taking into account these strong acquisitions.

Second quarter results

The company released its fiscal second quarter results on August 8. Revenue for the quarter increased 12% over the prior year period. Higher pricing drove a 14% increase, primarily due to the pass-through of higher material costs as well as the addition of the recently acquired PMMA and Aristech Surfaces businesses into the Engineered Materials segment.

These increases were somewhat offset by lower volumes in several segments, mainly due to lower demand in the building and construction, automotive, appliance and electronics segments. General public. Second quarter net income from continuing operations of $37 million was $96 million lower than a year ago and Adjusted Ebitda was $164 million, down $75 million than the company’s record performance over the prior year period. These decreases are mainly due to lower margins in the Raw Materials and Polystyrene segments as well as lower sales volume.

Trinseo’s CEO said, “We delivered strong second quarter results in a challenging operating environment that is forcing both Trinseo and our customers to deal with issues such as prudent spending in Europe due to a uncertain geopolitics and significantly higher energy costs, COVID-19 related lockdowns. in China, and continued supply chain constraints, including the lack of semiconductor chips.

At the end of the quarter, the company had $264.4 million in cash while total debt was $2.3 billion, which increased after recent acquisitions. With an expected Ebitda of around $600 million, the company’s debt ratio is around 3.4.

Evaluation

Analyst consensus earnings per share estimates are $4.00 for 2022 and $5.46 for 2023. This translates into very low forward price-to-earnings ratios, emblematic of the end of a recovery in cyclical activities. The enterprise value to EBITDA ratio is also low at 5.8 based on current full year EBITDA estimates.

GuruFocus’ discounted cash flow calculator gives the stock a fair value estimate of $50 plugging in EPS of $4.00 as a starting point and assuming long-term growth rates of 5%. However, due to the cyclical nature of this business, with often volatile fluctuations, DCF may not be the most reliable measure of value.

The company currently pays an annualized dividend of $1.28, which equates to a dividend yield of 5.35%. The forward payout ratio is below 50% based on 2022 EPS estimates.

Guru professions

Gurus who have recently added to their positions at Trinseo include Barrow, Hanley, Mewhinney & Strauss and Hotchkis & Wiley. Gurus who have reduced their positions include

Joel Greenblatt (Jobs, Portfolio).

Conclusion

Trinseo’s very low valuations reflect investors’ belief that reversals in commodity prices and cost pressures will lead to significant earnings downgrades. However, the above market dividend yield and low forward P/E ratios could, in my view, provide stability and future upside potential. It’s true that the stock is cyclical, but it’s selling at a 52-week low, which means investors who believe the economy will eventually improve again have an opportunity to buy at a price down if they like this action.

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